Results in both periods exclude restructuring and other one-time charges and include the operations of True North Communications, which was acquired in a pooling-of-interests transaction valued at $1.7 billion on June 21.
Third quarter operating results were affected by a challenging economic environment and world events that reduced client spending and impacted the pace of new business activity. Accordingly, third quarter revenue declined 7.4% to $1.6 billion from $1.7 billion in the 2000 quarter. Interpublic estimates that business disruptions following the tragic events of September 11 reduced revenues and operating income by approximately $35 million in the third quarter.
Net income before one-time costs was $54.5 million in the third quarter, compared to $107.7 million in the year-earlier quarter.
Given the uncertain political and economic environment, clients are understandably cautious and Interpublic’s revenue performance reflects their concerns. Our focus is on serving our clients, winning new business and controlling expenses, so we can achieve the best possible earnings performance in the near term and going forward, said John J. Dooner, Chairman and Chief Executive Officer.
During the quarter, Interpublic executed a previously-announced restructuring program. Cost cutting initiatives in the third quarter exceeded earlier estimates in response to continuing revenue weakness, which precipitated higher severance, lease terminations and other merger-related costs, totaling $592.8 million. In addition, the Company recorded $165.3 million of net non-cash charges recognizing the impaired value of goodwill and other assets.
Sean F. Orr, Interpublic’s Chief Financial Officer, said: Our restructuring initiatives have enabled us to better align our costs with our revenues. We’ve made significant progress on the cost side toward achieving our margin goals.
Inclusive of one-time costs and restructuring charges, the Company reported a net loss of $477.5 million, or $1.29 per share in the third quarter. In the third quarter of 2000, which also included some restructuring charges, the company reported net income of $90.8 million, or $.24 per share.
Revenue was $1.6 billion in the third quarter, compared to $1.7 billion a year earlier, reflecting reduced activity at most operating units. Domestic revenue declined 15.7% to $900.4 million, compared to $1,067.6 million in 2000. The company estimates that approximately 20% of the revenue decline was related to business disruptions following September 11.
International revenue grew 6% to $705.3 million. In constant dollars, international revenue also grew 6%, reflecting healthy gains in Europe (up 8%) and Latin America (up 9%), and flat revenue in the Asia/Pacific region.
Operating costs declined more than 3% in the third quarter to $1.47 billion, exclusive of certain non-recurring items. Salary and related expenses declined 5.1% to $942 million, reflecting lower headcount due to restructuring initiatives. Other operating costs were flat in the period.
Earnings before interest, taxes, depreciation and amortization were $231.2 million in the third quarter of 2001, or 14.4% of revenue, exclusive of restructuring costs and other non-recurring charges. In the third quarter or 2000, EBITDA was $309.4 million or 17.8% of revenue.
In July, Interpublic reported that it expected to incur approximately $500 million of cash charges related to realigning its business model, the integration of True North and other cost cutting initiatives. As revenue trends deteriorated, the Company expanded the scope of the restructuring program and, as a result, incurred severance, lease termination and other costs totaling $592.8 million in the quarter. For the nine months, the Company recorded restructuring and other costs totaling $645.6 million, of which $541.3 million represented cash costs.
The company believes these actions will yield annual savings of approximately $300 million.
Included in operating costs are charges of $85.4 million, relating primarily to miscellaneous operating assets, which are no longer considered realizable. Also included is a credit of $50 million resulting from reductions in existing severance reserves related to significantly lower headcount.
In addition, Interpublic recorded non-cash charges of $129.9 million in the quarter related to the impairment of goodwill and other assets.
Interest expense increased to $46.9 million in the quarter, from $36.5 million a year earlier, reflecting higher average borrowings.
Other net non-operating income was $6.1 million, which included $6.8 million of interest income. In the 2000 quarter, interest income was $11.6 million and the Company recognized $5.4 million of pretax gains on the sale of securities.
Interpublic’s tax rate was 42% for the third quarter of 2001, exclusive of restructuring and one-time charges, compared to 41% in the third quarter 2000. For the full year, the Company estimates its tax rate will be 42%, compared to 40% for 2000, primarily as a result of a change in the tax status of Deutsch, Inc. acquired in November 2000.
Interpublic expects improvement in the tax rate in future years resulting from ongoing tax planning initiatives, as well as from opportunities presented by optimizing True North and Interpublic operations globally.
